Notwithstanding a sharp rebound in equities, Goldman Sachs today said it stays "underweight" on Indian shares and has a Nifty 12 month target of 5,700 as the country's macro fundamentals are still "challenged".

According to the global financial services major, the domestic growth outlook for the Indian economy remains challenged, which coupled with tighter financial conditions may lead to lower valuations.

In late July, Goldman Sachs had downgraded Indian equities to 'underweight' saying domestic growth outlook looked weak. "Since then, the overall micro outlook has not changed much", it said.

After correcting 13 per cent from its July highs, the wide based National Stock Exchange benchmark index Nifty posted a 10 per cent snapback rally in less than a week following the new RBI governor Raghuram Rajan's announcements and is currently hovering around 5,800 level.

"Equities may extend their rally in the near term as markets worry less about the 'Fed tapering', but we would expect such a rally to fade and for markets to move lower in-line with the deteriorating fundamentals," it said.

The report further added that "our 12-month target for the NIFTY implies moderate downside, based on lower earnings and a cut in target multiple."

In the near term, Goldman Sachs economists believe inflation will rise (7 per cent forecast for FY14) and the RBI will likely keep monetary policy tight.

"As tightening in financial conditions has historically tended to affect activity with a two-quarter lag, we believe the recent tightening and the impact on activity should be visible from Q4 2013 onward," it said.

The report further noted that "given India is months away from crucial assembly and Parliamentary elections, political uncertainties and concerns about policy paralysis are likely to linger."

Goldman stays underweight on Indian shares; Nifty target 5,700

(Reuters)

Goldman Sachs remains "underweight" on Indian shares in its Asia Pacific portfolio and maintains its NSE